Self-dealing takes place when a fiduciary such as a broker, trustee, attorney, or other person in a position of trust takes advantage of their position to act for their own interests as opposed to those of their clients, corporate shareholders, etc.
In the case of a stock broker, when a broker agrees to carry out an order, they and their firm have a fiduciary duty to not place their interest before their clients, as well as to execute the order at the best market price available. Failure to do so constitutes a breach of fiduciary duty, and is a crime under New York state law.
If the self-dealing involves securities such as mutual funds, the Martin Act comes into effect. This act authorizes the Attorney-General to investigate securities fraud and apply civil and criminal penalties. Unlike traditional fraud statutes, the Martin Act does not require proof of intent to defraud to convict someone of a misdemeanor. The penalty for a self-dealing related misdemeanor is a fine of not more than $500 and imprisonment for up to one year, or both. If intent to deceive is proven in a self-dealing case, the crime is a class E felony and punishable by one to four years in prison. Self-dealing on a larger scale, such as the Ponzi schemes run by Bernie Madoff, can result in millions of dollars in fines and decades in prison.
When is the best time to act?:
All crimes that fall within the category of self-dealing carries heavy penalties in the event of a conviction, including but not limited to fines, imprisonment, and FINRA investigation. If a broker or brokerage learns that they are under investigation for self-dealing activities, they should contact a criminal defense attorney immediately.
High profile/Government cases:
Bernie Madoff’s Ponzi scheme is one of the best-known examples of self-dealing activity. Madoff’s scheme last over two decades and conned over $50 billion out of its victims (which included filmmaker Steven Spielberg), making it the largest financial fraud in U.S. history. In March 2009 Madoff pleaded guilty to eleven federal felonies and was sentenced to a maximum of 150 years in a federal prison.
Falsifying business records, grand larceny, mail fraud, making false statements, money laundering, securities fraud, and wire fraud are all crimes associated with self-dealing activity.
Mental disease / defect, false accusation, and proven lack of intent to defraud are both viable defenses in mutual fund fraud proceedings.
Difference between New York state and Federal statutes:
Title 18, United States Code, Section 1348, states that any person who knowingly executes a scheme to defraud another person in connection with any type of security or who acquires via fraudulent or false means any property or money connected to the sale or purchase of any security is guilty of securities fraud and can be punished by up to 25 years in a federal prison as well as a fine of up to $250,000.